Profitability Framework

Question 1

Profit Formulas (6)

Answer 1

1. Profit = Revenue - Costs
2. Revenue = Quantity x Price
3. Cost = Total Variable Costs + Total Fixed Costs
4. Total Variable Costs = Quantity x Variable Costs
5. Profit = (Price - Variable Costs) x (Quantity - Total Costs)
6. ROI (Return on Investment) = Profit / Costs

Question 2

Profitability (Profitability Framework)

Answer 2

1. Has there been a decline in revenue?
   - Decrease in quantity sold
   - decrease concentrated on product line, geography, or
   customer segment
2. Decrease in Price
   - Selling products @ a lower price, sales mix change (selling more lower priced products than higher priced)
3. Has there been an increase in costs
   - increase in variable costs (what cost elements have gone up ex. product parts)
   - increase in fixed costs

Question 3

Customer Needs & Preferences (Profitability Framework)

Answer 3

1. Have customer needs changed?
2. Have customer purchasing habits changed?
3. Do customers view the company differently?

*Good framework to use if revenue is the issue

Question 4

Market Trends (Profitability Framework)

Answer 4

1. Are there new technologies impacting the market?
2. Are there new regulations impacting the market?

Question 5

Suppliers (Profitability Framework)

Answer 5

1. Have suppliers increased their prices?
2. Have suppliers costs increased?

• Good framework if costs are the issue

Question 6

Competitors (Profitability Framework)

Answer 6

1. Have new players entered the market?
2. Have existing competitors made any recent strategic moves?
3. Are competitors also experiencing a decline in profitability/revenue
4. Are competitors also experiencing an increase in costs